ANALYSING THE IMPACT OF RATIO ANALYSIS ON THE GRANTING OF LOANS BY COMMERCIAL BANKS

ABSTRACT

This study was about the impact of ratio analysis on granting loan by commercial banks. The objectives were to find out the various types of ratios and their relationships in determining the loan portfolio in granting of loans in commercial banks and to examine the Relationship of ratio analysis in granting of loans in commercial banks.

The methods of data collection were primary, primary data which are information gotten directly from the field through the administration of questionnaire. Data was obtained using questionnaires of sample size 30. The methods of analysis were descriptive analysis and regression analysis. Our findings shows a strong significant positive relationship between the ratio analysis and lending decision (r=0.689**, p>0.01) which presupposes that if commercial banks effectively makes use of financial ratios it will lead to correct lending decisions by 68.9%.

Therefore 31.1% is the gap that needs to be closed by commercial banks and this is majorly due to short falls of the ratio analysis.

This study is important because it enables commercial banks know the influence ratio analysis have on the granting of loans in microfinance’s which is important for decision making by the microfinance’s themselves and the government. It was recommended that microfinance institutions should regulate their lending effort as they look on the influence ratio analysis have on granting of loans. This will have the effect of ensuring a stable banking sector which plays a big role in the economy.

CHAPTER ONE

INTRODUCTION

1.1 Background of the study

Commercial banks are special institutions in modern economy  and key pillars of financial systems because of their ability to efficiently transform financial claims of savers into claims (advances) issued to businesses, individuals and governments (Mishkin and Eakins, (2007).A commercial banks  ability to evaluate information, control and monitor borrowers implies that the commercial bank accepts a credit risk on this loans in exchange for a fair return sufficient to cover the cost of funding.Credit risk arises from the possibility that the borrower will not be a potential defaulter to the bank (Mishkin and Eakins, 2007.

According to UBAKA (1996), ratio is defined as a useful tool  which analysis’s a set of financial statements.  It is a tool available to accountants to analyze a set of financial statements.

The three basic financial statements which form the bedrock from which the financial ratios are usually computed for analysis are:

(a) Balance sheet

(b) Profit and loss statement

(c) Statement of charges in financial position

Analysis of the above financial statements requires ratio analysis which is mostly done by higher level management to which responsibility is maximizing profits and planning for the future.

Financial ratios are measurements of a business financial performance .ratio helps an owner or other interested parties develop and understand the overall financial health of the company(sujarweni,vw(2017) .financial ratios are used by busineses and analyst to determine how a company is financed.The various ratios are :

(1.)Liquidity RatioThis ratio measure’s the firm’s ability to fulfill short-term commitments and obligations out  of its liquid assets.  These ratios particularly interest the firm’s short-term creditors liquid assets include accounts receivable and other debts owed to the firm which will generate cash when those debts are paid in the near future.

The two types of liquidity ratio are;

(a) Current Ratio

(b) Quick or acid test ratio.

(C)Ratio cash .

(2.)Solvency Ratios:  Measure’s the extent of the firm’s total debt burden.  They reflect the firm’s ability to meet its short and long term debt obligations.These ratios are computed either by comparing fixed charges and earning from the income statement or by relating the debt and equity items from the balance sheet.

Under solvency ratio we have :

(i.) Debt-to -Equity ratio (DER)

(ii)Debt-to-Asset ratio(DAR)

(3.) Profitability Ratio:These ratio measures the success of the firm in ensuring  a net return on sales or investment. Profit being an ultimate goal of a firm ,poor performance indicates a basic failure which is not corrected over a longer period would result to a firm going out of business.Under profitability ratio we have:

 (i) Return on Equity (ROE)

 (ii)Net profit margin (NPM)

 (iii)Return on investment(ROI)

4) Turnover Ratio:it measures the position of resources utilization. Resources include5m (men,machine, material, money,method )IT.higher the turnover ratio ,better it is

(i) Debtors turnoverratio

(ii)Creditors turnover ratio

(iii) Assets turnover ratio

(iv)inventory turnover ratio.

(5.)Market Ratio:market ratio reflects the performance of concerned organization in secondary  market.market ratio are useful for investors of stock market  as it helps in fundamental analysis of concerned organization.

(I.) Dividend per share.

(ii)Earnings per share

(iii)dividend payout ratio.

1.2 ProblemStatement